Alignment of Principles From Trustee to Manager · 2015 Edelman Trust Barometer® ... Financial Services Media 2014 Results . NOES PERAC EMERGING ISSUES FORUM 2015 | 5 9 FUNDAMENTAL

Alignment of Principles From Trustee to ManagerGlenn Doggett, Director Professional Standards | CFA Institute

Hogan Conference CenterCollege of the Holy Cross, Worcester, MA

September 17, 2015

COMMONWEALTH OF MASSACHUSETTSPublic Employee Retirement Administration CommissionFive Middlesex Avenue, Suite 304 | Somerville, MA 02145Phone: 617-666-4446 | Fax: 617-628-4002TTY: 617-591-8917 | Web: www.mass.gov/perac

PERAC EMERGING ISSUES FORUM 2015 | 1

ALIGNMENT OF PRINCIPLES FROM TRUSTEE TO MANAGER

Glenn Dogge), CFA Director, Professional Standards September 2015

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2 | PERAC EMERGING ISSUES FORUM 2015

SESSION OUTLINE

§  Who is CFA InsLtute

§  Why Ethics and Professional Standards Ma)er

§  Applying CFA InsLtute Codes

§  Making ThoughRul Decisions

§  Conclusion and QuesLons

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DUAL ROLES OF PENSION BOARDS

§  Client of Outside Service Providers §  Service Provider for Beneficiaries

Alignment of ethical conduct and expectaLons across both roles is important

2

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To lead the investment profession globally by promoCng the highest standards of ethics, educaCon, and professional

excellence for the ulCmate benefit of society.

5

CFA INSTITUTE: OUR MISSION

Members ► 134,000+ investment professionals in 151 countries; 127,000+ hold the CFA charter (August 2015)

SocieLes ► 145 in 70 countries Candidates ► More than 221,000 registraLons for the three levels

of exam in last fiscal year from 180+ countries

Offices ► New York, London, Hong Kong, Charlo)esville (VA), Beijing, Mumbai, Brussels

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CFA INSTITUTE: A GLOBAL ORGANIZATION

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WHY DO ETHICS & PROFESSIONAL STANDARDS MATTER?

•  Well-‐funcLoning, efficient capital markets depend on the trust of the parLcipants

•  That’s why CFA InsLtute develops and administers codes and standards that guide the investment industry

•  These standards help ensure all investment professionals place client

interests first

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INDUSTRY TRUST RANKINGS

6 Source: 2015 Edelman Trust Barometer®

How much do you trust the following industries to do what is right?

78%

75%

71%

67%

67%

66%

63%

63%

61%

60%

60%

57%

54%

53%

51%

Technology

Consumer Electronics

Automotive

Entertainment

Food and Beverage

Consumer Packaged Goods

Brewing and Spirits

Telecommunications

Pharmaceuticals

Energy

Consumer Health

Chemicals

Financial Services

Banks

Media

2015 Results

80%

77%

72%

67%

66%

66%

64%

63%

61%

61%

61%

57%

54%

53%

52%

Technology

Consumer Electronics

Automotive

Food and Beverage

Entertainment

Consumer Packaged Goods

Telecommunications

Brewing and Spirits

Pharmaceuticals

Energy

Consumer Health

Chemicals

Banks

Financial Services

Media

2014 Results

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FUNDAMENTAL ETHICAL PRINCIPLES

•  Client interests come first •  PreservaLon of confidenLality •  Avoid/manage conflicts of interest •  Full and fair disclosure •  Fair dealing •  Reasonable care and prudent judgment •  Maintain independence and objecLvity

CODES & STANDARDS CFA InsCtute codes of conduct maintain that you must: •  Place the integrity of the profession and the interests of clients above your own •  Act with integrity, competence, and respect •  Maintain/develop professional competence Standards of professional conduct cover: •  Professionalism/integrity of the capital markets •  DuLes to clients and employers •  Investment analysis and recommendaLons •  Conflicts of interest and your responsibiliLes

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CODES

STANDARDS

VALUES

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WORKING GROUP REPRESENTATION • Council of InsLtuLonal Investors (US) • NaLonal AssociaLon of Pension Funds (UK) • OrganizaLon of Economic CooperaLon and Development (OECD)

• Swiss AssociaLon of Pension Funds • Hong Kong ReLrement Schemes AssociaLon • The Dutch AssociaLon of Industry-‐wide Pension Funds • Other industry professionals from Canada, Japan

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10

CONDUCT OF BOARD MEMBERS

•  Global Code

•  Focused on Personal DuLes as Trustee

•  Principle–based standards supported by guidance

•  Covers: Competence, Conflicts, & Loyalty

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REASONABLE CARE AND PRUDENT JUDGMENT 2. Act with prudence and reasonable care.

• Avoid harm to scheme parLcipants & beneficiaries • Act in good faith • Follow scheme parameters • Rely on third party service providers • DelegaLon to internal professional experts

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CLIENTS INTEREST COME FIRST

1. Act in good faith and the best interest of the scheme par5cipants and beneficiaries.

• Consider different types of beneficiaries and parLcipants • Hold their interests above interests of plan sponsor • Do not be swayed by outside interests

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AVOID/MANAGE CONFLICTS OF INTEREST

4. Maintain independence and objec5vity by avoiding conflicts of interest.

• Avoid appearance of impropriety • Place duty to pension scheme ahead of appoinLng enLty • Avoid personal conflicts • Avoid relaLonship with service providers • Refuse gits • Disclose conflicts • Ensure policies and procedures in place to address conflicts

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REASONABLE CARE AND PRUDENT JUDGMENT

3. Act with skill, competence, and diligence.

• Knowledge of: Policies, strategies, investments, etc. • EducaLonal, training opportuniLes • Seek appropriate professional guidance

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FAIR DEALING

6. Deal fairly, objec5vely, and impar5ally with all par5cipants and beneficiaries.

• No preferenLal treatment to a parLcular class • Balance interests of all beneficiaries and parLcipants

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CLIENTS INTERESTS COME FIRST

5. Abide by all applicable laws, rules, and regula5ons, including the terms of the plan documents.

• Consult with professional advisors • Ensure updated compliance procedures • Report suspected illegal acLviLes, irregulariLes

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REASONABLE CARE AND PRUDENT JUDGMENT 8. Regularly review the efficiency and effec5veness of the scheme’s success in mee5ng its goals, including assessing the performance and ac5ons of scheme service providers including investment managers, consultants, actuaries, etc., on a regular basis.

• Develop rules for employing investment managers • Ensure managers employ qualified personnel • Ensure managers comply with professional standards • Develop monitoring and control procedures • Review performance of managers

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CLIENTS INTERESTS COME FIRST 7. Take ac5ons that are consistent with the established mission of the scheme and the policies that support that mission.

• Drat and review policies addressing risk tolerances, return objecLves, liquidity requirements, tax consideraLons, etc.

• Take acLon consistent with policies • Consider suitability of investments • Achieve appropriate investment blend

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ASSET MANAGEMENT CODE ADVISORY COMMITTEE • Al Meezan Investment Management Limited • Australian Super • Callan Associates, Inc. • Franklin Templeton Investments • JK ACE Partners • JP Morgan Asset Management • New Amsterdam Partners • Pictet Asset Management Limited • TD Asset Management • University of California

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20

CONDUCT OF MANAGERS

•  Voluntary best pracLce code

of conduct for firms

•  Principle-‐based, allows

flexibility in implementaLon

•  Global standard of

professional conduct

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ASSET MANAGER CODE OF PROFESSIONAL CONDUCT

•  Client Interest First •  ConfidenCality

Loyalty to Clients

•  Reasonable •  Prudent •  Deal Fairly

Investment Process & AcCons

•  Inside InformaCon •  Best ExecuCon

Trading

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ASSET MANAGER CODE OF PROFESSIONAL CONDUCT

•  Appropriate Policies • Maintain Records •  Business ConCnuity Plan

Risk Management, Compliance, and Support

•  Fair and Timely

Performance and ValuaCon

•  Accurate, Complete, and Material •  Conflicts of Interest •  Investment Process

Disclosures

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FULL AND FAIR DISCLOSURE 10. Communicate with par5cipants, beneficiaries, and

supervisory authori5es in a 5mely, accurate, and transparent manner.

• Full and fair disclosure • No misrepresentaLon • Regular communicaLon • Plain language, effecLve communicaLon

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PRESERVATION OF CONFIDENTIALITY

9. Maintain confiden5ality of scheme, par5cipant, and beneficiary informa5on.

• Individual informaLon • CompeLLve ability (transacLons, holdings, etc.) • Privacy policies relaLng to handling such info

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PRACTICAL SUGGESTIONS

•  Act with integrity, 24 hours a day, 7 days a week

•  Always place client interests above your own •  Commit to global best pracLces of ethical and professional

conduct •  Hold others accountable for their unethical behavior

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ETHICAL DECISION MAKING FRAMEWORK

Identify •   Ethical principles •   Duties to others •   Important facts •   Conflicts of interest

Consider •   Situational influences •   Alternative actions •   Additional guidance

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Visit our website for more informaCon on CFA InsCtute

codes and standards

www.cfainstitute.org

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Documents

Alignment of Principles From Trustee to Manager · 2015 Edelman Trust Barometer® ... Financial Services Media 2014 Results . NOES PERAC EMERGING ISSUES FORUM 2015 | 5 9 FUNDAMENTAL